02 January 2016

As I noted in my first TTIP Update about the current negotiations between the EU and US over a massive trade agreement that is far from being only about trade, it is probably true that it will not include many of the more outrageous ideas found in ACTA last year. But that is not to say that TTIP does not threaten many key aspects of the Internet – just that the attack is much more subtle.

The problem is the inclusion of "investor-state dispute settlement" (ISDS). This began as a perfectly reasonable attempt to ensure that investments in developing countries were not unlawfully expropriated by rogue governments. The idea was that if such an event occurred, and the local government refused to compensate the investor, the latter had recourse to independent international courts that considered the case and awarded damages that could be levied against the government in question in other ways – for example, seizing their assets abroad.

Sadly, a sensible idea in one context has been seized upon by opportunists and applied in a context where it's quite inappropriate. In particular, companies are using ISDS against governments in Western countries. That's not necessary, because those countries already have extremely well-developed legal systems that allow the courts to consider allegations of expropriation by governments there. But companies have realised that ISDS tribunals give them an amazingly powerful way to overrule a country's laws. The following case illustrates how this works in practice.

It involves the US drug company Eli Lilly and Company, which has invoked the ISDS clause in the North American Free Trade Agreement signed between Canada and the US (and Mexico). Here's the background:

Eli Lilly launched its NAFTA attack after Canadian courts invalidated Eli Lilly’s monopoly patent rights for an attention deficit hyperactivity disorder (ADHD) drug called Strattera. The Canadian courts did so after determining that Eli Lilly had presented insufficient evidence (a single study involving 22 patients) when filing for the patent to show that Strattera would deliver the long-term benefits promised by the company. While the $100 million NAFTA investor-state compensation demand relates to revocation of the Strattera patent, Eli Lilly makes clear in its formal “Notice of Intent” to Canada that it is not only challenging the invalidation of its particular patent, but Canada’s entire legal doctrine for determining an invention’s “utility” and, thus, a patent’s validity. While pushing for an entirely different patent standard, Eli Lilly, the fifth-largest U.S. pharmaceutical corporation, is demanding $100 million from Canadian taxpayers as compensation for Canada’s enforcement of its existing patent standards.

In fact, Eli Lilly has now upped the stakes and demanded $500 million "compensation".

It's worth exploring what is going on here. Canadian courts have determined that Eli Lilly did not meet the required standard in order to be granted a patent. This is not a question of an arbitrary, or capricious act by some third-world dictator, but the final decision of a sovereign nation's highest court. However, Eli Lilly is unwilling to accept that decision, and has invoked the ISDS clause in NAFTA in an attempt to overturn the ruling and demand money. In other words, ISDS allows companies both to sue entire nations, and to ignore their laws.

Incredible though that may seem, here's why that is possible, as explained in the long and extremely detailed post from Public Citizen on the topic, quoted above:

The system elevates foreign corporations to the level of sovereign governments, uniquely empowering them to skirt domestic laws and courts and privately enforce the terms of a public treaty by directly challenging governments’ public interest policies before foreign tribunals.

The tribunals deciding these cases are comprised of three private sector attorneys, unaccountable to any electorate. Many of the tribunalists rotate between serving as “judges” and bringing cases for corporations against governments. Such dual roles would be deemed unethical in most legal systems. In this “club” of international investment arbitrators, there are fifteen lawyers who have been involved in 55 percent of the total international investment cases known today. The tribunals operate behind closed doors, and there are no meaningful conflict of interest rules with respect to arbitrators’ relationships with, or investments in, the corporations whose cases they are deciding.

Tribunalists are paid by the hour, creating an incentive for cases to drag out endlessly. Governments are often ordered to pay for a share of tribunal costs even when cases are dismissed. Given that the average costs for such procedures total $8 million, the mere filing of a case can create a chilling effect on government policy, even if the government expects to win. (In one challenge against the Philippines, the government’s tribunal and legal costs alone topped $50 million.) If a tribunal rules against a challenged policy, there is no limit to the amount of money the tribunal can order the government to pay the foreign corporation. The cases cannot be appealed on the merits. Countries may file for an “annulment” for certain specific categories of tribunal “error.” Annulment claims are not heard by domestic courts, but are decided by another tribunal comprised of private sector attorneys.

Investors and corporations can demand taxpayer compensation for policies that they allege as violating special “rights” granted to foreign investors by NAFTA-style FTAs. These “rights” are phrased in vague, broad language. Tribunals have increasingly interpreted these foreign investor “rights” to be far more expansive than those afforded to domestic firms, such as the “right” to a regulatory framework that conforms to a corporation’s “expectations.” This “right” has been interpreted to mean that governments should make no changes to regulatory policies once a foreign investment has been established.

Claiming such expansive protections, foreign corporations have launched investor-state challenges against a wide array of consumer health and safety policies, environmental and land-use laws, government procurement decisions, regulatory permits, financial regulations and other public interest polices that they allege as undermining “expected future profits.”

It's important to note that last point: ISDS allows companies to claim for not just alleged past losses, but also supposed loss of "expected future profits". These, moreover can be "caused" simply by a government passing legislation that happens to reduce a sector's future profits. They can include something as laudable as strengthening environmental protection, since the extra expense of meeting those more stringent standards would naturaly reduce profits. Even though this was carried out legally by the government concerned, and in order to protect public health, ISDS clauses would allow a company to sue for the "expropriation" of future profits caused by this move.

Now let's look at this from the point of view of open souce and the Internet. As the case involving Eli Lilly shows, patents are already being contested using ISDS tribunals. One obvious situation where this might affect open source is in the area of software patents. As I have pointed out many times, the situation in Europe is rather anomalous here. Although the European Patent Convention explicitly rejects software patents ("as such"), the EPO continues to issue them using various formal tricks. That's why there is continuing pressure to confirm the invalid nature of software patents nationally and at a European level.

But let's suppose that under the current TTIP treaty, ISDS is brought in between the US and EU. US software companies could then point out that affirming the invalidity of software patents granted by the EPO would obviously reduce the value of those patents. They would therefore doubtless claim that the European Union or member nations had "expropriated" that value, and demand compensation, just as Eli Lilly has for a patent that Canada decided should not be granted.

With the threat of dozens of huge companies threatening to sue Europe over tens of thousands of software patents, the European Union might decide that the cost of "compensating" them for their "loss" would be simply too great, and thus ultimately acquiesce in the grant of software patents, even though this was being imposed upon them.

But it's not just in the area of patents that the EU could find its hands tied. The same applies to copyright. For example, there are various areas where more flexibilities might be introduced into copyright law. US publishers might claim that these would cause their future profits to be diminished, and sue the EU or nation states for daring to make this move. Again, the scope for making changes to copyright law in the EU and in invidivudal nations would be greatly reduced for fear that deep-pocketed companies would start suing over things they didn't like – whether or not it was good for Europe and its public.

Similarly, I could imagine inventive lawyers trying to argue that the lack of harsh penalties for unauthorised sharing of copyright material in Europe causes US companies to "lose" profits as a result. This threat might be used to "encourage" EU lawmakers to pass precisely the kind of laws that were envisaged in ACTA: for example, criminalising even small-scale copyright infringement, and encouraging ISPs to pass on personal information.

Another approach might be to claim that any moves to adopting open standards, which would provide a level playing field for open source, would cause profits for existing incumbents to drop. They could then invoke ISDS and demand "compensation" for any such move. The same would be true for any preference given to open source in government procurement.

In this way, the actual or threatened complaints under ISDS clauses would push the EU to bring in precisely the worst ideas of ACTA, but without needing to specify them. So negotiators can claim quite truthfully that there will be no attempt to bring in ACTA by the backdoor; instead, they will just leave that to ISDS, which gives US corporations a weapon far more powerful than anything envisaged in ACTA.

And if you think I am exaggerating the scale of the threat here, take a look at this official report on ISDS by UNCTAD, the United Nations Conference on Trade And Development:

The Issues Note reveals that 62 new cases were initiated in 2012, which constitutes the highest number of known ISDS claims ever filed in one year and confirms that foreign investors are increasingly resorting to investor-State arbitration.

Foreign investors challenged a broad range of government measures, including changes to domestic regulatory frameworks (with respect to gas, nuclear energy, the marketing of gold, and currency regulations), as well as measures relating to revocations of licences (in the mining, telecommunications and tourism sectors). Investors also took action on the grounds of alleged breaches of investment contracts, alleged irregularities in public tenders, withdrawals of previously granted subsidies (in the solar energy sector), and direct expropriations of investments.

By the end of 2012, the total number of known cases reached 518, and the total number of countries that have responded to one or more ISDS claims increased to 95. The overall number of concluded cases reached 244. Out of these, approximately 42 per cent were decided in favour of the State and 31 per cent in favour of the investor. Approximately 27 per cent of the cases were settled.

Two of the most chilling facts are the following:

2012 saw some notable developments, including:

The highest monetary award in the history of ISDS (US$1.77 billion) in Occidental v. Ecuador, a case that arose out of unilateral termination by the State of an oil contract; and

The first treaty-based ISDS proceeding where an arbitral tribunal affirmed its jurisdiction over a counterclaim that had been lodged by a respondent State against the investor.

Remember, those awards would have to be paid by the state – that is, the people – and the same is true if ISDS cases come to Europe: it will be you and me who must pay because somebody claims that their future profits have been harmed in some way.

Despite the very high stakes – we are talking many billions of Euros here – few seem to be aware of the serious threat that ISDS represents to national and European sovereignty. We urgently need to make people and politicians aware of what is going on here before the ISDS mechanism is enshrined in TTIP for companies to use to attack both open source and the Internet in new and frighteningly effective ways.

About Me

I have been a technology journalist and consultant for 30 years, covering
the Internet since March 1994, and the free software world since 1995.

One early feature I wrote was for Wired in 1997:
The Greatest OS that (N)ever Was.
My most recent books are Rebel Code: Linux and the Open Source Revolution, and Digital Code of Life: How Bioinformatics is Revolutionizing Science, Medicine and Business.